Now before I start I'm not an expert on regulation and I am only speaking from my own knowledge and experience of trading in the UK.
Over the years I’ve seen a lot of changes to the retail investing landscape and I fear more restrictive measures may be put in place soon. In 2015 the Swiss removed the peg they had on the USD causing a flash crash wiping out accounts, causing untold margin calls and some brokers even went into administration. A lot of people were over leveraged trading the safe haven of USD/CHF. I remember reading reports of some people OWING brokers hundreds of thousands of pounds due to stop losses not triggering. On the flip side we had people who were owed tens of thousands by brokers. I was with Alpari at the time who went into administration and had to wait for a payout which took months after they went into administration.
In 2015/16 We also saw a massive rise in traders using ‘Binary options'. If you don’t know what they are you are basically betting that in a certain time period (usually minutes) that the price of a currency would be higher or lower than it is right now. I had a great system trading Binary options and made a lot money. As a result of the ease of use of binary options there was a mass influx of forex fraudsters luring people in to sign up to brokers and become rich. Obviously it was all for affiliate fees but people didn’t see through it. Lots of people were losing money trading binaries and you could also trade CFD’s or spread bet as a retail client with 500:1 leverage!
The flash crash in 2015 and the increased retail losses due to high leverage and binary options bought in a wave of new regulations from the FCA in 2016 (restricting leverage to 30:1) and then ESMA in 2018. They also bumped up margin requirements from a few % to over 20% for some assets.
Some of the rules really did protect the retail investor, negative balance protection is probably the biggest one. However, it indicates to me that regulatory authorities are not afraid to ramp up restrictions when they deem necessary.
𝙎𝙤 𝙬𝙝𝙮 𝙖𝙢 𝙄 𝙩𝙖𝙡𝙠𝙞𝙣𝙜 𝙖𝙗𝙤𝙪𝙩 𝙩𝙝𝙞𝙨?
This year alone brokers like eToro have added nearly 50% new clients following the crash in March. The mass influx of new investors and lack of knowledge will no doubt at some point leave people with empty wallets. Even with leverage restrictions it’s still very easy to blow accounts. My main concern is online sites such as WSB, TikTok etc which are actively pumping stocks. When a forum 4m+ strong can move the market powerful people will do whatever they can to stop it. This is already evident with Robinhood locking out traders from trading $GME (GameStop Corp New)$NOK (Nokia Oyj) and $BB (BlackBerry Limited) . Now, there is the argument that it is a discussion forum with no collusion but will that stop the SEC trying to get involved or changing the rules around retail investing? Options are extremely popular in the US and Robinhood is a big player in this field for retail investors.
𝙒𝙝𝙖𝙩 𝙘𝙤𝙪𝙡𝙙 𝙧𝙚𝙜𝙪𝙡𝙖𝙩𝙤𝙧𝙨 𝙥𝙤𝙩𝙚𝙣𝙩𝙞𝙖𝙡𝙡𝙮 𝙙𝙤?
In the EU the first thing they could do is ban leverage on CFD’s and spread bets completely.
In the US they could restrict options trading to professional clients only.
They could take legal action against discussions forums such as WSB or potentially try to impose sanctions on companies like TikTok or Instagram in relation to advertising trading products. I know actual advertisements are already banned on instagram but it doesn't stop people pumping or advertising on their own account.
Short selling is already banned for some markets in the US.
We’ve also seen the regulations increase around cryptos recently.
The above is all hypothetical and the list isn't exhaustive but I do think regulators will be keeping a close eye on the influx of new investors to the markets.
The regulations I would like to see should be targeting institutions. A stock should NEVER be over 136% short, these funds are driving companies into the ground by leveraging short positions, it's a disgrace. I'd also like to see short interest figures released daily as opposed to every 2 weeks. To make it a level playing field everyone should be able to access the same data. If Citadel can buy retail data we should be able to see theirs.
Now just to add some people will rightly say CFD’s and Options are just derivatives of the underlying asset and don’t move the actual stock. This is correct, however, brokers and providers of liquidity may hedge the position you take by buying or selling the actual shares. So although your position doesn’t directly affect the market, it can indirectly hit the stock price by the broker hedging your position.
We are in uncharted territory with retail investment and it will be interesting to see how the next few years pan out
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